How to make useful cash flow projections

cash flow projections

Cash pays the bills, not profits. Just because a company is profitable does not imply it will not run out of money. In any business, cash flow analysis and forecasting are probably the most essential part of business planning. This is where business owners look back at their finances and make most major financial decisions, from reinvesting stocks to hiring new staff. While forecasting the future may appear difficult, here are a few steps on how to do a cash flow projection effectively.

  1.   Look back to the past

What is the correct way to look at a statement of cash flows? A good tip would be to look back at past cash inflows/outflows, and how it affects the cash balance. Have an accountant run a report on inflows and outflows of cash in your business, including deposits, royalties, and any other revenue, as well as payments made, whether recurring or one-off. Identify the recurring ones and put them on a schedule. Also take note of any customers who tend to make late payments, and how long they usually delay their payments. Taking note of these factors will help you build an effective cash forecasting model for your business.

  1.   Look to the future

Once the list of payments transacted in the past, it is now possible to make a 4 to 6-week cash flow projection analysis. With your accounts receivable report as well as customer payment history, it is easy to project when the cash will come in. Remember to factor in any eventualities that may affect the time the money enters your bank account. Calculate what you expect to receive for services that you plan to provide in the future. Do the same for your outflowing money, with your accounts payable and expected expenses. Since you are in charge of your own business’ cash outflow, it will be easier to project. Remember to factor in the rent, utilities, and other expenses, including one-off purchases. Then calculate your payrolls, standard or variable, such as overtime, bonuses, and commissions. Any other additional outflows such as loan payments and dividends payable also need to be included in your cash flow projection analysis.

  1.   Refine projections

Learning how to project cash flow, just like any other skill, needs to be developed. Keep refining and adjusting it on a weekly basis until you get the hang of it. Bear in mind that in businesses, there definitely will be variables that affect the amount of cash inflow and outflow, often out of your control. Keep at it until you are able to observe which variables you can tweak and adjust in order to have a more stable cash flow projection analysis. Eventually, you will be able to build up to longer-term cash flow projections that will help you prepare for any shortfall in cash way ahead of time.

  1.   Use and engage with cash flow projection

Make a habit of looking over your cash flow projections every week. This will lead to a better and more proactive approach to a business’s financial management. Even if you find out that you will run out of money in say, 3 weeks, you are better prepared to handle this with a level head and figure out what you need to do to tide you over. It will also help you figure out what caused this shortfall and how to mitigate and handle it in the future.

Follow the tips above, and you will see just how efficient cash flow projections are in helping you manage priorities and spending behaviour. You will be able to optimize your cash flow and budget efficiently.

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